New York Markets After Hours

Broker bankrupted in kangaroo court

Commentary: Industry group loses evidence in whistleblower case

By

AlLewis

Columnist

DENVER (MarketWatch) — Mark Mensack joined Morgan Stanley in 2008, landing an $873,000 signing bonus, but now he’s in personal bankruptcy and just moments away from losing his home in Cherry Hill, N.J.

He’s turning 50. He’s got a wife and three kids. And this is where he’s landed after losing an arbitration with his former employer before his industry’s self-regulating body, the Financial Industry Regulatory Authority.

Mensack claimed he was forced to leave Morgan Stanley
MS, -1.71%
after he accused the firm of taking hidden fees from its retirement-account customers. In July, a Finra panel ruled against this would-be whistleblower and ordered him to pay Morgan Stanley $1.2 million, essentially demanding most of his bonus back after quitting, plus interest and legal fees.

Mark Mensack

It is extraordinarily difficult to successfully appeal a Finra ruling. It is even more difficult when Finra mysteriously loses several hours of recorded testimony.

Mensack told me that when his attorney requested recordings for an appeal, Finra wouldn’t produce them. He said he eventually learned that eight of about 18 hours of testimony from his case were missing. He sent me audio files that were inexplicably cut off at the end. He also showed me a Jan. 13 letter that Finra regional director Katherine Bayer wrote to his attorney. It said:

“Finra is required to make a... recording of every hearing. ... Unfortunately, portions of testimony returned to us by the panel are missing. ...I apologize for this and any perceived miscommunications from the Finra staff about the status of the recordings. ...I understand Mr. Mensack’s disappointment with the arbitrator’s decision. However, Finra has no authority to reverse the award.”

Goldman: Another PR disaster

(3:15)

A senior executive at Goldman Sachs tenders a public resignation letter in the New York Times, leaving the firm to cope with its latest public-relations challenge.

“He had a full opportunity to present them, represented by counsel, in an extensive formal hearing. The arbitration panel gave them fair consideration and rejected them in their entirety. ...Having failed in arbitration, he is now attempting to prosecute his case in the media.”

Mensack wanted to prosecute his case in a New Jersey state court, where he initially filed a whistleblower’s lawsuit. But Morgan Stanley attorneys successfully argued in 2010 that his claims should be heard before Finra — an industry-friendly body that sometimes displays little regard for evidence.

In October, the Securities and Exchange Commission ordered Finra to hire an outside consultant to fix a problem it has producing documents. The SEC ruled that on Aug. 7, 2008, Finra’s Kansas City office altered “three records of staff meeting minutes just hours before producing them to the SEC inspection staff, making the documents inaccurate and incomplete.”

To me, this is the very definition of a kangaroo court: An alleged hall of justice that loses — and even tampers with — key records in its leaps of judgment. What kind of organization shuts down a whistleblower’s claims, bankrupts him with a $1.2 million order and then can’t find the testimony behind its damning decision?

Mensack is fond of quoting Harry Markopolos, who was famously ignored when he tried to blow the whistle on Bernie Madoff. Two words Markopolos has called Finra: “Very corrupt.” Markopolos pointed out in congressional testimony that Madoff himself was chairman, and his brother Peter vice chairman, of Finra’s predecessor organization.

At the very least, Finra has proven absurd the argument that an industry can police itself.

Mensack has a long list of accusations against Morgan Stanley and Finra, from perjury and fabricating evidence to ethics violations and incompetence. He says the missing arbitration recordings would help prove these claims.

Instead, he will go down in history is an example of what happens in the financial industry if you spot something you think is wrong and try to drag it out in the open.

“My No. 1 concern,” Mensack said, “is not losing my house.”

Unfortunately, he can’t stop taking the word “fiduciary” literally. A commissioned U.S. Army officer, he taught philosophy and ethics at the U.S. Military Academy in West Point. He is also an accredited investment fiduciary analyst and continues to work as an independent fiduciary consultant.

Mensack claims that when he went to work at Morgan Stanley, he discovered the firm, and the companies it partners with on retirement accounts, were double-dipping into a $4 billion pool of 401(k) assets. He says he first thought it was an innocent gaffe by people who didn’t understand their fiduciary responsibilities. But when he ran his concerns up the ranks, he says he was retaliated against and ultimately forced to leave.

“For me to work at Morgan Stanley, and sell 401(k) products, I would have had to lie to people,” he said. “That would have put me in a fiduciary breach. I can’t do that. ...There is no amount of money that is going to make me knowingly lie to people. ...And Morgan Stanley never gave me a way out.”

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